Bitcoin is an online crypto currency that has grown significantly from its introduction in January 2009. While tech enthusiasts like using it for its own sake, it is mainly used in black and grey market transactions. If you want to get money out of Cyprus or if you want to switch your money into Argentinian pesos without going through official channels then bitcoin is the right tool.
It was also the currency of choice for people in the developed world looking to buy drugs online. This marketplace, known as SilkRoad, was closed down recently. Rather than falling, bitcoin prices have doubled since the closure.
Source. The day Silk Road was closed is easy to see in this chart.
Why? There has been some good news for bitcoin. Baidu, one of China's larger internet companies, has a security and firewall division accepting payments in bitcoin. This seems like a really positive trend for bitcoin, but speculators should not count on China to promote official acceptance of a currency designed to get around capital controls. Once party leaders understand that situation it is unlikely that this trend will continue in China.
Still, there is another reason for the price of bitcoin to go up. With the closure of Silk Road, many users who were active users of bitcoin became hoarders as they had no where to spend the money. Inertia means many of them remained holders of bitcoin, and in the face of rising price action they will likely remain holders and opt to instead spend currencies that face inflationary pressure. In addition to users who are no longer spending their money, the government seized the bitcoins of many Silk Road users. This means the supply of active bitcoin in the market shrank significantly in the aftermath of the closure. This reduction in supply more than countered the reduced demand for bitcoin by consumers who might have been enticed by Silk Road to enter the bitcoin ecosystem.
Bitcoin is a fiat currency whose main value is its effective design and current network effects. As long as it is accepted in the black and grey markets around the world it should flourish. However, speculators should always keep the idea in the back of their mind that despite it's increasing value, bitcoin could still be the Friendster of the crypto-currencies.